Managing payroll offshore can seem like a complicated, overwhelming task. So, for U.S. companies with employees in Mexico, we’ve prepared this brief guide to understand the diverse salary agreements and schemas that should be considered when setting up payroll in this country.
We have more information on some of the legal aspects of hiring in Mexico in our Mexico Tech Salaries Report 2023. The report will dig into how an employer of record can help companies navigate hiring in Mexico.
First, you must get familiar with the Spanish terms for each wage agreement and the English equivalent (we are going to explain them later):
- Sueldos y Salarios – Salaries and Remunerations
- Sueldos Asimilados a Salarios – Salaries Assimilated to Wages
- Honorarios – Professionals Fees / Contractors
- Mixto – Salaries and Remunerations Mixed (either with number 2 or 3 in this list)
You should also know the Mexican tax authorities and labor agencies:
- Secretaria de Hacienda y Credito Publico – Ministry of Finance and Public Credit
- Servicio de Administración Tributaria – Tax Administration Service
- Instituto Mexicano del Seguro Social – Mexican Institute of Social Security
- Instituto del Fondo Nacional de la Vivienda para los Trabajadores – Workers National Housing Fund Institute
In this brief explanation, We show you what you should know about Mexico payroll laws and each wage agreement and the most common payment schemas that exist in Mexico. But before that, we must understand the following:
What is a payroll or nómina?
We can answer this question from two angles:
For companies. It’s a list of the workforce who earn a salary.
And for workers. It’s the amount the employee receives for the work completed, either weekly, biweekly or monthly.
The payroll structure
Before talking about salary and wages schemas, you also have to understand their structure and concepts.
Income
The income the employees receive in their paycheck is broken down into the different types of compensations:
- Salary. The gross amount of money you pay for their work.
- Bonuses. They include performance bonuses, seniority, achievement of goals, among others.
- Extra hours. If you are paying for extra hours in addition to their regular schedule, they are also included here.
- Premiums. Annual gratification, profit participation, Sunday and holiday premiums.
- Commissions. If their job is to sell a product or service, sales commissions must be stated separately from their salary.
- Wage Subsidies Employment subsidy, grocery vouchers, etc.
Deductions
Deductions will depend a lot on the type of contract the employee has with the company. However, the essential payroll deductions are:
- Social Security (IMSS): Social protection applies to the insured, their spouse/partner, children under 16 years of age, and parents. Employees who earn more than the minimum wage have to pay a share of the Social Security contributions every month, amounting to approximately 10% of their salary.
- Housing Fund (Infonavit): INFONAVIT is a government housing assistance agency designed to help Mexican workers purchase homes. Employers have an obligation to register themselves and their workers with INFONAVIT and to contribute the equivalent of five percent of each worker’s daily wage to his or her account at the Institute
- Income Tax (ISR): This is a direct tax on profits earned. The ISR is determined by the difference between revenue and deductions. The income tax rate is 30% on average.
- Value Added Tax (VAT): Locally known as IVA, applies to all imports, supplies of goods, and the provision of services by a taxable person unless specifically exempted by a particular law. Mexico applies a single standard rate of 16% across the country, except on Mexican Border states of Baja California Norte, Baja California Sur, Quintana Roo, or Sonora, where it’s reduced to 11%.
- Afore or Retirement Fund: It’s a personal account of each worker managed by an AFORE (Pension Funds Manager). Such account, during the service life of the worker, accrues the tripartite contributions. The individual account is made up of 3 large subaccounts, namely: Retirement, Severance in old age and Old Age, Housing, and Voluntary Saving.
Type of contract
The employees’ payroll deductions, benefits and perks, and even their employment rights depend on the type of contract they signed with the company.
The Federal Labor Law of Mexico considers at least six types of employment relationships or contracts, stated below:
- Por tiempo indeterminado – Indefinitely
- Por tiempo determinado – For a specified time
- Para obra determinada – For specific project
- Por temporada – For a season
- Para capacitación inicial – Initial training
- Periodo de prueba – Trial period
Payment Periodicity
Depending on the company and the employee’s agreement, the payroll or payment can be made weekly, biweekly, every 14 days, or monthly.
- Weekly: Refers to the seven-day pay period.
- Fourteen: Covers 14 days.
- Biweekly: This payment periodicity is the most common and covers 15 days.
- Monthly: It is paid after 30 days of completed work, and if necessary, adjustments will be made when the payroll is calculated for 28, 29, or 31 days.
Mandatory Employee Benefits
The Federal Labor Law of Mexico outlines the mandatory benefits that an employee is to receive. There are mandatory benefits the employees receive, and there can be supplementary private benefits that the employer can provide.
- Vacation Days: From 6 to 22 days every year depending on the employee seniority
- Rest days: for every six days of work the employee will enjoy 1 day of rest at least with full salary.
- Vacation bonus: The vacation bonus is 25% of the corresponding salary during the vacation period.
- Mandatory paid public holidays: There are eight paid public holidays in Mexico.
- Sunday Premium: Employees required to work on a Sunday must receive an additional 25% of their daily salary on top of their normal daily salary.
- Christmas bonus: equivalent to a minimum of 15 days, must be paid before December 20 of each year.
- Maternity leave: Women receive 6 weeks paid leave prior to birth and 6 weeks following birth, and for adoption there is 6 weeks leave following placement of the child.
- Paternity leave: A father can rest 5 days when the child is born.
- Seniority Premium: When a work relationship is terminated or voluntary resignation, as long as the worker has worked 15 years or more at the time of resignation.
- Finiquito or Benefits for voluntary resignation: Consists of the payment of the pending wages, pending bonuses, unused holidays, accrued Christmas bonus, and severance pay (compensation of 3 months of salary).
- Profit-Sharing / PTU: 10% distribution of declared profits to be paid within 60 days after the federal tax filing deadline (May 30).
- Social Security System: All workers are entitled to be registered in the Mexican Institute for Social Security (IMSS).
- Retirement and housing fund: Through the Retirement Savings System (SAR), the employee has life and disability insurance. And through the Workers’ Housing Fund (INFONAVIT), the employee is entitled to participate in housing programs and mortgage credits.
Most common wage agreements in Mexico
Now that we have a general understanding of what payroll is and how it is structured, let’s understand the various modalities in Mexico to pay a worker’s salary.
Recapping, these are the top four:
- Salaries and Remunerations
- Salaries Assimilated to Wages
- Professionals Fees
- Salaries and Remunerations Mixed
What does Salaries and Remunerations mean?
This is the most common payment schema in the whole country. Those who receive their income via Salaries and Remunerations by law must receive the following: Christmas bonus, holiday premiums, profit sharing, social security, Infonavit, and Afore, among others other benefits.
The advantages for employees of the Salaries and Remunerations schema are:
- The company is in charge of reporting the employee taxes through the Salaries and Remunerations tax regime.
- Right to all the benefits by Law (mentioned above).
- Subsidy in case of dismissal or voluntary resignation.
The disadvantages for employees are:
- Taxes deducted from the income are very high (20-30%), and generally, the worker ends up receiving a meager salary in cash.
Example of payment in the payroll schema:
| GROSS SALARY | $ 50,000.00 |
| ISR | -$ 10,709.00 |
| IMSS | -$ 1,745.00 |
| NET | $ 37,546.00 |
What does Salaries Assimilated to Wages mean?
This schema commonly applies to employees who work remotely for the company. One of its main characteristics is that the regulations do not consider workers as direct employees but rather professional service providers; therefore, the deductions are much lower than in the 100% Salaries and Remunerations schema.
The advantages of payment in the Salaries Assimilated to Wages schema:
- Workers pay only the applicable Income Tax (ISR), and they are exempted from paying VAT.
- The company retains the applicable ISR, and the worker is released from making their declarations.
- The company does not make additional withholdings for social security, Afore, Infonavit, or any other benefits, that by law, apply only to workers with an employment relationship.
- Workers are not required to meet a schedule since they are hired by objectives.
- The company can offer superior benefits and perks since it is not obliged to grant the minimum legal benefits.
The disadvantages of payment in the Salaries Assimilated to Wages tax regime:
- The worker does not have any tax subsidy, so the amount of ISR to pay could be somewhat higher if the company does not have a good tax strategy.
- The worker assumes responsibility for the annual tax declarations.
- Workers expect private health coverage, housing compensations, and other income benefits because they are not receiving the corresponding minimums by law.
Example of payment in the schema assimilated to salaries:
| GROSS SALARY | $ 50,000.00 |
| ISR * | -$ 5,203.50 |
| NET | $ 44,796.50 |
* Workers can write off some expenses to get some refund in their annual tax return through deductions for health, education, or other expenses.
What does the Professional Fees/Contractors schema mean?
Payment by Professional Fees is a widespread schema among freelancers. The agreement is straightforward; the professional performs the service and receives the agreed payment for their work, including taxes in the total charge.
Those who receive payment by professional fees are responsible for filing their taxes themselves, removing this additional responsibility from the companies or clients that hire them.
The advantages of payment by professional fees/contractors:
- These workers obtain higher cash income than those obtained by workers on the payroll.
- Withholdings can be minimal with a good tax strategy.
- Companies are released from all tax obligations.
The disadvantages of paying by professional fees/contractors’ schema:
- Workers must keep their accounting to declare their expenses and income, which can be complicated for new freelancers.
- Freelancers must be registered with the treasury agency (SAT) with their correct professional activity to avoid penalties.
- Workers do not apply for social security contributions unless they register themselves.
- Freelancers do not apply for company benefits by law unless the company wants to offer them.
- There is no job security since no employment contracts are signed.
Example of payment by professional fees/contractors:
| GROSS SALARY | $ 50,000.00 |
| ISR * | -$ 12,500.00 |
| NET | $ 37,500.00 |
* Workers can write off some expenses to get some refund in their annual tax return through deductions for health, education, or other expenses.
What does Salaries and Remunerations Mixed payroll mean?
The mixed payroll schema comprises two or more types of income, commonly Salaries and Remunerations and Salaries Assimilated to Wages.
The Salaries and Remunerations income part guarantees that workers receive their legal benefits such as Christmas bonus, vacations, profit sharing, social security, Infonavit, Afore, and premiums.
On the other hand, the payment via Salaries Assimilated to Wages guarantees that the workers’ salary is higher by limiting the tax burden applied to the payment.
In this mixed schema, the company and the employee can agree on how to adjust the percentage of each type of income. Usually, the company proposes the most convenient tax strategy so that the employee receives a higher salary in cash.
The most effective use of this schema in Mexico is 25% Salaries and Remunerations income and 75% Salaries Assimilated to Wages.
The advantages of the mixed payroll schema:
- Workers receive all the legal benefits corresponding to their Salaries and Remunerations income.
- Workers receive a higher cash income.
- The company takes care of the employee accounting, so the workers have less burden.
The disadvantages of the mixed payroll schema:
- The income via Salaries and Remunerations is much lower than the actual total income, so that it will affect employees’ social security, housing, and retirement contributions.
- In the event of a disability ruling by social security, it will only pay what is registered as the employee salary under the Salaries and Remunerations schema.
- The credit capacity that Infonavit (housing agency) will grant workers does not reflect their actual payment capacity.
- Additional benefits and annual Profit-sharing is at the discretion of the employer.
Example of payment in the mixed schema:
| GROSS SALARY | $ 50,000.00 |
| Net Salaries and Remunerations income | $ 10,000.00 |
| Gross Salaries Assimilated to Wages income | $ 40,000.00 |
| ISR | -$ 5,000.00 |
| NET Salaries and Remunerations income | $ 45,000.00 |
As you can see, there are different payment schemas that companies can use to improve employee net income. This is an important component of enhancing employee benefits in Mexico.
The schema with a considerably more attractive cash salary is the Mixed payroll, followed by Salaries Assimilated to Wages from the previous examples. Therefore, companies can use these strategies to give their employees a better cash remuneration and offer better benefits than those required by law.
In fact, tech companies are known for offering high perks and premium benefits that are more appreciated by the employees, such as:
- Private health care for the whole family (LinkedIn),
- Flexible hours (Spotify),
- Unlimited vacations (CodersLink)
- Free meals (Google),
- Rent in tourist places (Airbnb),
- Four months of maternity or paternity leave (Facebook),
- Pets’ insurance (LinkedIn),
- $10,000 Bonuses for Nonprofit Volunteer Work (Salesforce),
- Unmatched Workspaces (Google).
- Remote work,
- Retirement plan,
- Gym memberships,
- Daycare,
- Tuition reimbursement programs,
- Educational incentives,
- Disability income protection,
- Relocation assistance,
- Company stock options,
- Company Car (Depends on distance from Office),
- Company Transportation (pre-determined routes and specified hours to take workers to and from work).
- Company Cellphone,
- Performance Bonus,
- Reimbursement for internet and phone
- Discounts at Mall
- English lessons
- Massages/ Nutritionist and hairstylist
- Among others.
Understand Mexico’s Payroll Laws and Hire Developers in Mexico with the Help of an Employer of Record
Navigating new labor regulations seems daunting. Understanding the local economy and legal requirements provides companies peace of mind and confidence that they are working in compliance with the law and hiring the best software developers, engineers, or tech talent they need. Learn more about hiring in Mexico and talk with our recruitment specialists that can help you create the best payroll strategy for your employees.
